A Comment -- General Comments From an Expert (A Commentary)

Markets. We are down to the end game with Greece, which is a good thing. It has been 5 years trying to sort this out. Had thought the market had paid way too much attention to Greece. It comes down to the uncertainty of the event more than the event itself. Not sure on how it is all going to be played out. His suspicion is that the referendum will be the end game. Even if they vote No to the austerity measures, it doesn’t necessarily mean that they are going to exit the euro zone. It could play out for some time to come. This is a great buying opportunity. You have a crisis that was really not that big of a crisis. We have had an increase in volatility, and one of the things that investors want to keep an eye on is the notion that we have had 5 years of very strong markets without much in the way of a correction. The #1 strategy has been momentum. If you bought momentum stocks in this low volatile environment with low interest rates, you have done very well. As volatility starts to come up and interest rates start to rise, you may start to see a shift into more value kind of strategies or stocks. This is what he is looking at right now.

Selling deep in the money Calls on high dividend stocks? This Reduces the cost of the stock to the point where the dividends actually looks very attractive. You are getting a 6.5% yield, whereas if you bought the stock in the market and didn’t Sell the Call, you would get whatever the normal yield would be. The problem is that when you have a “deep in the money” Call, very often you will find that they get assigned early. If you write an option that is a year from now, each quarter when the dividend comes due, that option can go into a point where it has no time value. That option will often get exercised and the other person will take the dividend. Arbitrageurs do that all the time.

Mining. We are getting closer to the end of the bust in the sector. We went through a 10+ year super bull market in commodities and a lot of excesses were built up with excess money being thrown in and it was time to start getting rid of that. Thinks we are nearing the end now, but we’ll still be dragged along for a while. The mining cycle has always been boom and bust. When we come out, it will look even better. The sector is down 50%-80%, depending on which index you look at. Because of this, things are a lot cheaper, but that doesn’t mean everything is worth buying. There are a few good projects and companies out there worth buying. He is focusing on identifying very competent people that understand what a real economic project looks like early on, and trying to get in with those groups on the discovery/pre-discovery stage. We are producing more metal than what we are finding and it is taking so much longer to find these projects and they are so much more expensive to bring them into production.

Markets. We are in a holding pattern until we get this whole Greek business settled. He does not feel it is all that critical anyway. 70% of the Greeks want to stay in the Union. He thinks there will be a draft agreement that will kick the can down the road. Numbers on the US housing side are getting back to a more normal level. There should be a backlog of demand for housing. Unemployment is down and wages are up so we are on a roll. Recently it looks like US consumers are spending some of that savings on gasoline. He is drifting to ETFs. He favours certain sectors for ETF investing.

REITs. He is negative on REITs because he sees interest rates rising. He would wait for the first rate increase by the FED and see what REITs do. The real estate market on a longer term basis looks great. A US hotel REIT may not be a bad investment.

The great bull market in fixed income is over. A lot of people did quite well sitting in fixed income mutual funds. The only place you can go is equities. He is not as keen on pipelines as he has been in the past as a replacement for fixed income.

Markets. The economy is continuing to recover, unemployment is continuing to go down and house prices are continuing to go up. There are huge savings for the US consumer because of gasoline prices. We are just waiting for Greece to get out of the way. Stocks in Europe are relatively cheap. QE in Europe is good. The stock outlook is good, even if the economic outlook is tepid. China slowed down a lot faster than people expected. You have excess capacity and prices dropped to clear out inventory and that impacted margins. He doesn’t like Japan because of corporate governance problems. They all claim they are going to increase dividends and buy back stocks. You haven’t heard that in 20 years and this is significant. He is bottom up and only 10% macro. He has a good US weighting and is overweight in Europe. He has a low weighting in Asia. He is a marginal buyer in Japan.

Markets. For the last several months North American equity markets have been trading in a very narrow trading range. There is anxiety among investors regarding equity valuations. The S&P is trading at around 17-18 times PE earnings and the same with the TSX. There are geopolitical pressures that stem from Greece which is at the forefront right now. US$ headwinds are talked about all the time. There is an eventual pending liftoff of US interest rates, and investors are worried about the trajectory of interest rates. Expect this sideways pattern will continue, especially given the fact that we will traditionally have some seasonal summer weakness in the months ahead. We need to see the earnings backdrop improve before we see a more meaningful advance for the markets. Expects some market swings that will be driven once again by global central bank inactions. Volatility is the key. We’ll probably see plenty of market movement, but probably not a lot of direction or conviction. Equities still look better than bonds, certainly with interest rates moving up, and they still look better than cash.

Markets. The potential for higher interest rates and the stronger US$ has affected the performance of the markets. US markets are up 2% year-to-date, essentially unchanged, whereas European and Japan are up mid-teen rates year-to-date. Most of his US holdings are up and down, basically sideways. The strong contributors to performance have been European and Japanese names. Typically, expanding interest rates coincide with more rapid economic growth, and he sees economic growth continuing to stabilize and pick up on a global basis. Once you focus through the headwinds, profit outlook will improve into 2016. US and Canadian equity markets should start to pick up again as we get closer to 2016-2017. European growth was basically zero last year and will probably be around 1% this year, which is a horrible growth. It’s the incremental change of growth that is very, very positive for risk assets and how stocks will behave.

Markets. The US is his favourite place. He doesn’t see anything going wrong there. It has a great capital market, great currency, continuing ongoing recovery, low interest rates and lots of oil. He sees things continuing to improve. Has been doing a little bit of selling in Canada because he sees a lot of headwinds here. Moved some of his funds into Europe and sold some of his Canadian equities to do that. Thinks there are a lot of good reasons to be in Europe, but at the moment he is still a little bit tentative about it because there are still geopolitical situations. Also, has some investments in Asia, not a lot, but he likes the Japanese situation.

ETF’s versus Mutual Funds? Both of these are fund trusts. There is no front end commission or back end commission on ETF’s. The annual MER’s (Management Expense Ratio) are somewhere between 7 to 20 basis points, but in a mutual fund, you are going to perhaps be paying 250 basis points, which is to cover off the 5% commission that is paid up front to the financial planners. Not only are ETF’s cheaper, but you have to look at the long-term impact of these extremely high fees on your portfolio.

Markets. He hopes the US is growing and turning the corner. At the end of the day what is important to him is job growth, other than the recent blip. He believes the second half of 2015 will see more economic gains and consumer spending. He hopes for 2.5% growth. The Euro zone is exhibiting a bit of momentum and is turning the corner. They have weak oil prices, the currency and the Greek situation. Growth may be 1.5 to 2%. Japan is the wild card. There are still some structural issues, but there are numerous things that bode well: currency, oil prices, and corporate governance reform. In Canada he thinks better prospects are outside of Canada because of oil and the extended consumer. The Canadian consumer is more stretched than the US consumer.

Exposure to banks Where we are, he is procyclical, and the financials kind of fit in there. They are a pretty good place to be for income. He likes the banks with international exposure. In terms of insurance companies, you can pursue MFC-T for non-Canadian exposure in the US and Asia. It is significant. You get benefits with insurance in a rising rate environment. You give up a bit of yield with insurance.

Gold. It works in one of two extremes. It won’t work in the middle ground that we are in now. There is no inflation.

Markets. The second quarter is very different from the first. At the beginning of this year they were very well set up to take off and were up 10% right away. Now we are right back where we started. Whenever you are going through any interest rate change, they move. The move is not warranted by the value of the real estate. There is a lot of demand for commercial real estate right now. It is the yield curve that brought them down. However, REITs always move too far. We are seeing strategic reviews because the market is too inefficient at this time. Right now, the real estate is too cheap as valued by the stock market. Smart money is still coming into the real estate market. If you have pension obligations and can get 6% return in real estate plus some appreciation over time, then you buy it. The investor is now starting to see through the threat of a change in interest rates.